Finance Update: Guidelines on the application of the Sustainability Linked Loan Principles detailed
07/06/2021 - Reading time: 4 minutes
Due to the increasing volume of sustainability-related loans in the global credit markets, the Asia Pacific Loan Market Association ("APLMA"), the Loan Market Association ("LMA") and the Loan Syndications and Trading Association ("LSTA") have recently, following an initial update in 2020, refined their Sustainability Linked Loan Principles ("SLLPs"), first published in March 2019, again.
All loan instruments that offer lenders incentives (e.g. interest rate reductions) to achieve specific, predetermined sustainability perfomance targets ("SPTs") are classified as sustainability linked financings. The focus of the standards for sustainable linked financings - unlike the standards for loans granted exclusively to finance sustainable/green projects ("Green Loan Principles") - is thus on the general improvement of the sustainability profile of borrowers.
The new specifications of the SLLPs aim to create more clarity for market participants in the selection and measurability of SPTs and to structurally align the SLLPs with the ICMA Principles for Sustainability Linked Bonds in order to ensure a uniform and coherent approach for sustainability-related financial products across the entire debt capital market.
In addition to the purely structural adjustments to the ICMA Principles for Sustainability Linked Bonds, the following alterations result from this:
- Tightening of the transparency and information requirements regarding SPTs and the recommendation to involve external experts in assessing the suitability of SPTs;
- specification of the key performance indicators (KPIs) required for the measurability of SPTs; these must now be relevant to the borrower's core sustainability and business strategy and must be constantly measurable over the term of the loan and comparable with an external benchmark (e.g. Taxonomy, SDGs);
- Appendix 1 of the SLLPs, which contains a declarative list of potential KPIs, has been expanded to the areas of social (e.g. human rights) and governance (e.g. business ethics);
- companies are encouraged to make their KPIs publicly available on an annual basis, now also being addressed to companies that are not publicly listed; and
- mandatory annual independent and external verification of KPIs by a qualified external auditor with relevant expertise, such as an auditor, environmental consultant or independent rating agency.
In particular point 5 is noteworthy, as financings will only be considered sustainable financings with an annual independent and external verification of the borrower's performance regarding the fulfilment of its SPTs. The new SLLPs are applicable to financings from June 2021.